NetZero Sticks to Its Guns as AltaVista Pulls Free-ISP Plug

With its stock nearing pennyland, NetZero points to the market's seeming irrationality.
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At the end of the day, will there be zero free Internet service providers left standing? No, there will be NetZero (NZRO) , insists Mark Goldston, CEO of the only pure-play free ISP on the market.

All the same, now that

CMGI's

(CMGI)

AltaVista

has announced it's

shutting down its free ISP, Goldston is having a tougher time convincing Wall Street of his company's long-term viability.

NetZero's stock closed unchanged at $1.06 Wednesday; the company's shares traded as high as $40 earlier this year.

Well Of Course He Does

The simple issue circling around NetZero is whether the company can overcome the cost of providing free Internet access to Americans by selling advertising those users see and getting a slice of the money they spend online. And AltaVista is the last in a long line of companies that have found that the answer is no, not long after its parent CMGI announced it was also shedding its free ISP provider

1stUp.com

, and

Spinway

, which provided free access to users of

Kmart-backed

(KM)

free ISP

BlueLight.com

. (

Juno Online Services

(JWEB)

, NetZero's only publicly traded rival, is trying to entice its free ISP subscribers to pay for service. Its stock fell 41 cents, or 21%, to $1.53 Wednesday.)

Going to NetZero?
Free ISPs follow similar paths

Though all free ISPs might look the same from a distance, Goldston insists his company is different enough to keep going as others fail. Spinway and 1stUp.com, Goldston says, had similarly bad models in that, as private-label free providers, they lost too much revenue in their partnerships with the companies that put their own brands on the service. "They basically gave up the start page for free," he says. "They were running a commodity business where they owned all the cost and gave up a majority of the revenue."

I'm Still Standing

By offering service under the NetZero brand, "We keep all the revenues from the start page, we keep all the revenues from all our products," says Goldston. For the fiscal first quarter ended Sept. 30, NetZero reported revenue of $16.5 million, a net loss of $28.9 million and negative cash flow from operations of $19.4 million.

The current economic client doesn't spell doom, the CEO says: "It's a weak ad market, but it's not a locked-up ad market." NetZero, he says, will be "the last man standing."

The market isn't agreeing, unfortunately. The company has more than $200 million in cash, but NetZero's market cap is less than $135 million. "Our stock today is ridiculous," Goldston says. Investors "are not even valuing all the cash. It's just irrational."

Because of the cash that Juno and NetZero have on hand, they'll be able to last for "quite a while," says Youssef Squali, Internet analyst at

ING Barings

. But he's not optimistic about the fundamental business. "The free Internet access model is going away," Squali says. He rates the stock neutral; his firm hasn't done underwriting.